Energy Giant Shell Says Oil Demand Could Peak in Just Five Years – Commentary

This blog refers to the following recent Bloomberg article on “peak oil demand” and also, MarketPlace on November 16 even made the incorrect case that “peak oil demand”, driven by increases in efficiency, is somehow different than “peak oil” in general: it isn’t, peak oil (demand if you will) is related to budget constraints that are ultimately stemmed from resource constraints …

“We’ve long been of the opinion that demand will peak before supply,” Chief Financial OfficerSimon Henry said on a conference call on Tuesday. “And that peak may be somewhere between 5 and 15 years hence, and it will be driven by efficiency and substitution, more than offsetting the new demand for transport.”

I’ve commented on this before with regard to people discussing peak oil. Over the long-term, there is no difference between peak supply and peak demand. In order for Shell and others to extract more oil, consumers need to want and be able to purchase the refined products from that oil. Peak supply is defined by peak demand as much as peak demand is defined by peak supply. Ideally both supply and demand follow each other. But if they don’t to an “extreme”, then there are lower profits and layoffs in the industry (supply > demand) or recession can happen if demand > supply to a large enough extent (e.g., due to price rise in oil without time to substitute).

Thus, peak oil demand (which we can’t actually define demand due to lack of data) IS a response to oil supply constraints and (a finite Earth more generally) in the long-term. If not, what else is responsible for the lack of purchasing power of consumers? If U.S. workers were getting paid higher incomes AND deciding not to purchase more oil AND working normal 40-hour work weeks, then we’d would have a reason to think about whether demand was being tempered by choice. Until then, the most logical conclusion is that consumer budgets are constrained, and these constrained budgets are not independent of resource constraints and increased difficulty for companies to make profits (thus lower margins and lower wages to save even those low margins).

SECOND: On the topic of biofuels and hydrogen replacing oil

“Shell will be in business for “many decades to come” because it is focusing more on natural gasand expanding its newenergy businesses including biofuels and hydrogen, Henry said.“Even if oil demand declines, its replacements will be in products that we are very well placed tosupply one way or the other, so we need to be the energy major of the 2050s,” Henry said. “Thatunderpins our strategic thinking. It’s part of the switch to gas, it’s part of what we do in biofuels,both now and in the future.”

While Simon Henry is not directly quoted here in discussing hydrogen as a substitute for oil, he does discuss biofuels. This is an absurd assertion that there will can simultaneously be a peak in demand for liquid fuels from petroleum but that for some reason consumers would still be able to afford to substitute biofuels (that have much lower net energy and are restricted by land use, even algae is limited due to low net energy) or hydrogen (which is not a primary fuel and is difficult to store).

I do believe the world will continue to electrify (via renewable electricity) to reduce demand on hydrocarbons which can be used for physical material feedstocks as well as fuels. But please, let’s not tell people … still … that biofuels and hydrogen can substitute for oil anywhere in the next several decades. We need to have invested much much more into hydrocarbon-efficient end-use devices (e.g., electric vehicles) before we can afford even a fraction of current developed world lifestyles if we power any decent percentage of our economy on biofuels and hydrogen.

Always remember, it is “energy price” x “energy consumption” = “energy expenditures”, compared to incomes and GDP that determine whether or not energy is expensive. To afford higher prices (e.g., $/BBL) you need to become more efficient for each BBL, and that efficiency is not at zero investment costs.